ASX outlook: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams

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CONFLICT in the Middle East has prompted heightened market volatility and rallies in oil and gold prices.

In the US, Fed watchers saw enough rhetoric from committee members last week to suggest the Fed would stay on hold at the next meeting on November 1.

However, slightly stronger-than-expected September consumer and producer price data raised concerns that the Fed might not be able to sit on the sidelines for too long — especially with tailwinds from volatile components such as energy.

There was speculation that China was about to pull the long-awaited stimulus lever to address their economic doldrums — but this was overwhelmed by other events.

Ten-year government bond yield fell 19bps in the US and 8bps in Australia last week. The US dollar was stronger while the AUD was again weaker.

Most commodities apart from energy and gold were weaker.

Equity markets generally managed to finish up for the week. The S&P 500 rose 0.47% and the S&P/ASX 300 gained 1.42%.

US economy and macro

We saw a number of instructive comments from Fed committee members which point to their current thinking.

We also saw the release of the Fed minutes from the previous meeting.

Both indicated the Fed is increasingly comfortable keeping rates unchanged next month.

There is also a developing theme of Fed members explicitly noting that the recent increase in bond yields could substitute for increases in the federal funds rate.

Fed president Raphael Bostic reiterated that he saw no reason for more hikes, saying policy was “sufficiently restrictive” to lower inflation to the 2% target. “I don’t think we need to do anything more,” he said.

This followed similar recent comments from other Fed presidents Philip Jefferson and Lorie Logan.

President Christopher Waller said policymakers could “watch and see” as financial markets tightened and “do some of the work for us”.

The September Fed meeting minutes noted that “almost all” participants judged that it was appropriate to keep the target range for the federal funds rate unchanged.

“The data arriving in coming months” would help clarify the extent of additional tightening needed to return inflation to the Fed’s 2% target.

All participants agreed the rate-setting Federal Open Market Committee “was in a position to proceed carefully” in setting monetary policy at coming meetings.

It was also noted that GDP growth “had been expanding at a solid pace” but real GDP growth was expected to “slow in the near term”.

A survey of US small businesses showed sentiment remained at depressed levels.

Consumers were feeling similarly subdued and inflation expectations remained at elevated levels, according to University of Michigan research.

We saw US inflation data from three other sources last week:

1. Producer Price Index (PPI)

The headline PPI advanced +0.5% in September. This was a touch stronger than expected and put the yearly gain at +2.2% (up from +2% in August).

Energy goods prices rose 3.3% monthly while and food prices grew +0.9%. Though the core PPI measure (which excludes food, energy and trade) matched consensus with a 0.2% monthly gain

2. Consumer Price Index (CPI)

The eagerly awaited CPI report also came in a bit higher than expectations at +0.4% monthly and +3.7% yearly, versus consensus of +0.3% and +3.6% respectively.

Shelter and energy were the key drivers for headline CPI. Core CPI advanced +0.32%, which translated into a +4.1% yearly gain.

The breakdown of the CPI indicates a few noteworthy trends:

• Services inflation remains consistently higher and stronger, though some forward-looking indicators suggest rent should have a moderating effect going forward.
• Commodities and food effects have dampened over the course of the past 12-18 months.
• Energy has a deflationary effect, though this could easily change with base effects and current prices.

Markets didn’t take this CPI too well on Thursday.

It was the third data overshoot for September (after US non-farm payrolls and the PPI), prompting markets to question whether the Fed had indeed finished hiking — and whether rates had seen their highs.

3. Import prices

To cap off the stronger-than-expected inflation numbers, US import prices came in at up +0.1% in September.

The core import price metric (seasonally adjusted) also edged up +0.1%.

Initial jobless claims (a weekly report that measures the number of Americans who filed for unemployment benefits for the first time) continue to remain low at 209,000, indicating that US labour markets are still tight.

China macro and economy

Early indicators following China’s October Golden Week holiday suggest tourism spending in China jumped 130% year on year, but was up only 1.5% from 2019. 

Macau and its casinos benefited during the holiday period, but travel abroad held below pre-Covid levels.

This aligns with views of continued sluggish activity in the Chinese economy, especially on the consumer consumption component.

Credit growth and credit impulse largely stabilised. Chain’s official “Total Social Finance” credit growth — a measure of the total amount of credit provided by the financial system — stabilised at 9% yearly.

Markets were excited by a Bloomberg report that Chinese policymakers were weighing the issuance of at least 1 trillion yuan ($137 billion) of additional sovereign debt for spending on infrastructure such as water conservancy projects.

That could raise this year’s budget deficit to well above the 3% cap set in March, according to one of Bloomberg’s sources.

An announcement could come as early as this month, though deliberations were ongoing and the plans could change.

The discussions underscore mounting concern among China’s top leaders over the trajectory of the world’s second-biggest economy — and how growth compared to the US.

It would also mark a shift in Beijing’s stance.

Beijing has so far avoided broader fiscal stimulus despite a deepening property crisis and rising deflationary pressure which have put its 5% annual growth goal at risk.

Australia macro and economy

There was not much data last week, other than a couple of business and consumers surveys.

NAB’s latest business survey showed easing in conditions in September.

Business conditions fell to +11 in September from an upwardly revised +14 in August (originally reported as +13). That’s still above the long-run average of around +6.

Surveyed business confidence was stable at +1.

Quarterly measures of price pressures also continued to ease, including labour costs (-120bps to +2%), purchase costs (-110bps to +1.8%) and final product prices (-70bps to +1.0%).

Acceleration in inflation following a minimum award wage increase in July now looks to have faded. Though in level terms overall inflation pressures remained elevated (about 4% annualised for final prices).

Australian consumer sentiment rebounded +2.9% to 82 in October, according to a Westpac Melbourne Institute survey. This was driven by improved perceptions of family finances — up from very subdued levels.

That said, in level terms sentiment was still tracking around 20% below the longer-term average.

On the housing market, the “time to buy a dwelling” index rebounded 4.8% monthly from very subdued levels, while the house price expectations index rose +3.8% to a new cycle high of 160.4.

Some 70% of respondents expected house prices to rise over the next 12 months.

Oil and energy

The market is watching to see whether the Israel-Hamas conflict stays contained, or spills into other oil-producing countries nearby.

Spiking energy prices have historically caused damage to the global economy, though we note that the “oil intensity” of GDP growth in the US, EU and China has fallen materially over time.

All eyes remain on Saudi Arabia and Iran and how they respond.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team. He has more than 18 years of experience in Australian equities.

Rajinder manages Pendal sustainable and ethical funds including Pendal Sustainable Australian Share Fund.

Pendal offers a range of responsible investing strategies including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

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